Paymentus Holdings, Inc. (PAY) Earnings Call Transcript & Summary

All right. So next up, we have got Dushyant Sharma, Founder and CEO of Paymentus, as well as Sanjay, CFO, who's got a 2 for today. Guys, thanks for joining us. Dushyant, you founded Paymentus back in 2004, and then Sanjay joined as CFO in 2023. Was hoping you can maybe spend a moment on just the core business. For those who are a little bit less familiar with the story, what is Paymentus, what is the problem that Paymentus is trying to solve?

At the highest level, actually, we are trying to simplify bill payments. We all pay bills, but if you can imagine, bill payment itself isn't as simple as it could be. And as a business, we are a cloud-based service provider for nondiscretionary recurring billing companies like utilities, government services, insurance, telecom, health care, education or other verticals.

Yes. That makes sense. And so I guess from the perspective of a new customer, what does the implementation of Paymentus look like? And kind of what's the core value proposition when you kind of sign up with a new biller?

Yes. Actually, the core value proposition is twofold. First is how could you improve the customer experience and simplify it so that it's easy for you to collect from your customers. The second is in the process of doing that, can you also reduce the cost to serve for the billing companies themselves? And the implementation of Paymentus actually, believe it or not, it touches all aspects of your organization. If you think about it from our customers' standpoint, we are touching the most valued assets for our customers or the billers. Number one, their customers from engagement for billing and payments, and the second, their money, their revenue. So improvements in that area and implementation of an enterprise cloud solution like Paymentus, the cloud-based implementation requires you to interact with all aspects and modernize all aspects from the customer experience, executives, customer service to treasury, finance, billing, collections, all of those areas.

So maybe you could talk a little bit about the market opportunity. I mean, everyone's got bills to pay. How large do you think the market is? And how much of that market do you think is sort of addressable to Paymentus?

The bill payment market itself is actually big, and it is growing. We have -- there are about 16 billion to 17 billion bills which are annually paid. We are doing well, but we have only captured a fraction of that last TV process about 450 million payments. So you can see it's still a very -- it's a scale business. We have billions of dollars, we are processing billions of interactions, we're still a fraction of the market. Increasingly, I would like to say that almost all of that market is available to us at this stage. There was a time when we were only focused on serving the billers. So there was a portion of the market which was the bank centric, which was not as available to us. There was a time when we were a young company focusing on only a certain segment or the certain size of the customer body right now, as we talked about in the last earnings call itself, that we are increasingly getting the interest from the largest billing companies, the household names. And primary reason for that is, historically, they used to outsource the solutions. And now when they are looking at Paymentus as a platform and the ecosystem with our Instant Payment Network and our reach, that we can capture 100% of your customer base using our platform and the ecosystem, it becomes a very attractive value proposition, especially given it can't be replicated. And as a result, we are seeing attraction from some of the largest billing companies. So we feel like that the entire market is accessible to us. Or at least the vast majority of it.

And when you think about kind of consumer behavior in the bill pay space, I know 1 of the things you talk about is just the enrollment rates of things like paperless billing, whenever you implement a new merchant. I think maybe for this audience, I think most people probably have bills all set on auto pay, but I know that's probably not the norm in the industry. So can you help level set, what does the industry look like and what are the billers kind of grappling with when customers don't have auto-pay set up?

That's a great question, actually. And if I take you back several years, I used to actually get this question, especially from the investors, early investors as well. If you think about it, there's a dichotomy from -- in a customer body of a given billing company. 15% of the people are easiest to collect from because they have time management issues, not the cash management issues. And they are more likely to be setting up auto pay, whether they're bank side or the billing companies and so on. Almost 80% or 85% of the population is not that fortunate. They have to make a decision at any given month or any given week, which bills they're going to pay and how they're going to pay it. Are they going to use their credit card? Are they going to use this -- given the other expenses that might be going on in a typical household, how would they make the payment? So for the billing companies, the fifth -- we used to have actually a slide that almost all investments prior to -- as part of our founding strategy to the market -- used to be that almost all investment prior to Paymentus had gone into the customers who are easiest to collect from. And what Paymentus was saying that billing companies, their biggest challenge is that 85% of the customers who have been vastly underserved. And therefore, billing companies, the biggest challenge is how do you get those customers who -- 30% to 35% of that customer base, which is -- they're typically late or they may not be communicated as efficiently. So they may need a phone call, et cetera. So we are automating all of that process for the billing company. So we've become a very attractive option for the billing companies. From their point of view, the customers who are not that difficult to collect from, they are great. They will always love them. But the ones where 1 phone call to the billing company by a given customer in a year can erode the entire margin from that particular customer for the entire year is a very expensive affair to service those customers. And multiply that by hundreds of thousands of subscribers or millions in many cases. So we become a very important tool for the billing companies to collect from those folks.

You mentioned the market used to be a lot more kind of bank-centric, and we've seen this kind of shift over to biller direct models. I know Paymentus has exposure on kind of both sides of the ecosystem. But I guess from your perspective, what role do banks still have to play in the bill pay space? And then how do you see kind of relative share between 2 channels playing out?

I think if I may take a second, just talk about what happened to the banks, I mean, we love banks, and we have some great partnerships with banks today. And -- but what happened with banks was that they basically -- they stayed the same. They stayed with the legacy service providers who weren't innovating. And what happened, they had the majority of the market. Almost every 1 of us, you can think of us like we would go to the bank and make the payments. And what they thought was the bank thought that was okay to get payments from the customer for all the 10 bills and then the back send a paper check out. And it -- so what if it takes several days or sometimes the checks get lost and so on. They didn't appreciate or understand, especially their service providers. Banks probably did because they were dealing with the other side of the merchant economy. But we -- when you have a check missed by a customer who originated it or an online payment at the bank site, there, it's originating into a call, multiple cost to the billing company. The billing companies are having to scramble to find where the payment is. So it was a very -- in some ways, a nightmarish experience. We simplified all of that. We simply said to the billing company, as I talked about, we are going to give you a platform where you will collect more payments than all of the banks combined in the United States using Paymentus within 90 days of putting our system up. So it becomes a very powerful statement, and we have proven time and time again. So banks started to lose the market share to Paymentus platform, which was being adopted by the billers. But what we wanted to make sure we do is the folks who are generally inclined to use the banks, we want to improve the experience for them. So now what we have done, we have created a Instant Payment Network, which is our proprietary network of billing companies who are already participating on Paymentus platform. And we are taking that experience and offering that to the bank so that banks can now originate a payment in real time, have the payment posted real time, much like you would go to a billing company's website and do the transaction.

Yes. That makes sense. I guess you touched on the IPN, kind of a differentiated strategy in this space. I mean, how do you see this strategy playing out? Is there any way to kind of contextualize how significant IPN is today as a percentage of gross profit or something along those lines?

So the numbers we haven't shared publicly is it's -- IPN -- we don't think of IPN as a different sort of product per se. We think of this as a continuum of offering for our billing companies as well as the participants on the other end of the network like banks and fintechs and so on. Our goal is from a billing company's standpoint, can we reach almost 100% of your customers with 1 integration with Paymentus platform. And -- which expands far beyond your own property. So for example, if you're using our platform, a billing company can offer online payments. They can offer IVR-based system, automated phone systems. They can offer mobile payments, tax payments. You can call the call center or make a payment using our platform. You can set auto pay and so on. But then there are payments happening which were cash-based payments, which are happening on retailer stores, payments which are happening on the bank side. So for us, we're saying to the billing company that participating in Instant Payment Network, which comes by default as part of our platform, you get almost every 1 of your customers, regardless of where they're originating the payment. And go back to the original strategy of Paymentus and the billing companies' ideal scenario: allow customers to pay and interact with me as a billing company wherever they are, however they want to interact and whichever payment method they want to make a payment using, allow that to happen.

Yes. I know traditionally, it's been more in kind of like the reoccurring monthly bills, a lot of utilities. Can you talk about payments companies that maybe work with more kind of subscription-oriented billers? Like how do you think about payments -- I know PayPal is a big partner for instance. How do you think about kind of payments processors as partners versus competitors?

We actually -- our main payment processes today, PayPal is 1 of them. JPMorgan Chase is another one. And many others. We actually have great partnerships where they are reselling our platform as well. And we think of this as a -- it's actually a pretty interesting scenario where bill payments is different in the sense that there is a workflow required before a payment could be accepted. So it's not like simply going to a retail online shop, you have selected the flowers, the bouquet of flowers you want to send, and the payment only comes into play at the checkout, and you select the checkout option at that particular point. What Paymentus's bill payment solution is actually you are having to figure out what invoice, how many invoices, what different policies, for example, in insurance scenario, need to be presented to a customer before they can make a decision to make a payment. So all of that is handled by Paymentus. So we see great opportunities where a lot of our partners, when they realize the level of sophistication required for the workflow management for a given payment is more complex, Paymentus would be the partner in that scenario. So we think of this as a great opportunity, processors as a great opportunity to continue to grow our business.

I think this past quarter, you talked about seeing very strong bookings this quarter, ahead of last year's levels. A lot of new enterprise, larger merchants also across a diverse set of verticals. So maybe can you expand a bit what are you seeing in terms of pipeline today and how you think about mix of growth? And I guess, any updates in terms of just how pipelines continue to evolve?

Yes. So our pipeline actually, we remain very excited about the business opportunity for us from all verticals we service, whether it is our core verticals like utilities, insurance, government, but then also we have our consumer finance and we also have nascent verticals, whether it's health care, education and others. We are seeing pipeline in all of those areas. One of the key things we talked about last quarter was, as I shared earlier as well, the enterprise, the large end of the market is also showing up in our pipelines because we are getting tremendous inbound interest from those customers as well. As -- where we sit today, frankly, we feel like that is a pretty interesting inflection point for the company. We have gone through the initial stages of building a business, proving out that we could profitably serve the market, to then going IPO and then dealing with some inflationary challenges we dealt with and then demonstrating to the market that we can deal with those challenges and actually come out ahead while making sure that we are able to rerate where it's needed with our customers, but also keep our customers. So we were able to do all of that in a very thoughtful and, frankly, a well-executed plan. And also demonstrate that our contracts already allowed for all of those capabilities. So we were able to demonstrate all that. Where we sit today is, the market has moved somewhat in our direction where people are starting to take a look at that a company that has a culture of innovation, customer-centric culture is providing a tremendous platform along with Instant Payment Network, our ecosystem which allows me to capture all of my customer base with 1 integration. I think I need to take a serious look at this company. So as a result, our pipelines are stronger than ever before.

And 1 of the other reasons we are seeing a very strong pipeline over the past few quarters is our platform is agnostic to the verticals we operate in, whether you are utilities, telecommunications, health care, financial services, you name it. As far as bills are going to get paid by consumers by logging to a platform. This is a platform we can -- this is a business we can serve. So I think that agnostic piece and the piece of nondiscretionary payments, that differentiates us and gives us a very upper edge in this market in terms of how we serve. And that -- as Dushyant said, once we become public and we've demonstrated our strength in terms of performance, not only financially but even operationally that we can deal with small size to midsize to large size enterprise customers, that is giving us now an opportunity to go and break into those kind of customers which we were not able to earlier when we were private. So I think that's 1 of the reasons why we are seeing a very strong trend in our pipeline. At the same time, you're seeing that in the bookings, which ultimately has been delivered in revenues as well.

So maybe segueing off that last answer, Sanjay, when you think about building up to the growth algorithm over time for Paymentus, how do you build your growth forecast? And how do you think about maybe growth from new versus existing billers in any given year?

Yes. So there are 3, I would say, pillars on which our revenue growth stands. Number one, which is a significant -- most significant piece is the growth of our existing customers, which we call as same-store sales. Which comes mainly from our customers themselves, our billers themselves increasing their customer base. So eventually, as their customers increase, we are going to get the benefit because the payments are going to be coming from that platform. At the same time, within another component of same-store sales is the digitalization tailwinds we are seeing. World is moving more from manual to digitalization base of payment, and we are benefiting from that. So these are like inherent benefits to our business on which we don't have to spend any costs, and they are by default of 1 of whole growth vectors. And the other piece of the business is the growth or the new implementation, sorry. And the new implementations come in as and when our new billers are getting implemented. And we have seen since last few quarters, as COVID is now behind us, we are seeing the pace of our implementation growth getting better quarter-over-quarter. In fact, the most recent quarter we had seen in Q2 was the best quarter in terms of number of days it took for implementation, the least number of days we ever saw. And the trend's continuing in that direction as well as we are putting more investments towards improving processes for implementation. We are automating them more. And as I said, COVID is behind. So people are actually having live meetings. We're going to the meetings where we are having those discussions, which solves the problem, which earlier during COVID days was not easy to solve. So we're getting the tailwinds of post-COVID as well, if I say so. And that's all helping the new implementations. The third vector of growth, I would say, is the mix of the customers as well, which entails the pricing changes, the pricing strategies we are implementing with all our billers. As we march along the growth with our billers, we are seeing if there are reasons or ways for us to work on the pricing strategy. Generally, when we enter into a new customer or we enter into a new booking, we have an expectation of how much price to expect, how much profitability to expect. But overall, as time passes, we do make those evaluations. And if it triggers a point that we should go and work with the billers, we work with them. And that's an opportunity we have based on our contractual obligations and rights as well. So we work with our contract -- with our billers on contracts to gain price improvements as well. So this is the third segment, I would say. And all these 3 in a combination are helping our revenue growth.

I wanted to dwell maybe on some of the commentary on implementations because I know in the past, there have been some -- 1 of the factors that drove some variability in results. And I feel like it's been consistent over time that the end market sometimes only moves as fast as it does, and you can't kind of force it to move faster. What has changed? Is it just that kind of getting into this post-COVID environment that caused this acceleration in the implementation time lines recently? And kind of how sustainable does the current pace feel?

Well, let me answer this last part, but I think it is sustainable. As far as things have come back post-COVID, things -- it should be sustainable, and we are seeing a very good momentum on that. And it's not easy to stop that momentum, unless something happens in the overall macro, which like COVID, something like that happens again, which nobody can control. We are at the pace of delivering growth, and we are seeing consistent improvement. And at the same time, we are putting a good amount of effort in terms of how we make these processes more efficient, not only for ourselves to implement, but also for our billers to implement because it's a partnership of the billers technology team and our implementation team to join hands in a partnership and make that implementation faster. If 1 of those 2 sides just gets a little bit behind, the whole project gets behind. But right now, we are seeing a traction on both fronts. Both forces are joining hands, both have the objective to implement faster. Generally, our billers have time lines, deadlines in which they have to transition from 1 system to the other. So at the same time, we are governed with that pressure. But on the other hand, there is a drive among both the teams to get these things faster. It gives us the benefit definitely to the new customer, and we would like the implementation faster. But for a biller itself, there is an opportunity for them to move to because of a solution which they have chosen. It only -- it gives them a great return on investment they are doing. It gives them the new user interface. It gives them the latest platform, latest technology. So there's a driving force on both fronts, and it's working really well.

Got it. Makes sense. 1 theme has been just kind of the diversification of the different verticals. You talked about insurance this quarter, health care, telecom, government. What is the vertical mix today? And if you can give us any sense for how that has just changed over the last couple of years?

I think we -- prior to going public as well, I think we were focused primarily on utilities, and we had 2 or 3 main verticals in addition to that, insurance, consumer finance and government services. I think what has happened since public in each of those verticals, we are already seeing tremendous progress at the larger end of the market in all of those verticals. One of the other things which we are seeing is using the ecosystem we have built and the partnerships we now have, we are able to enter into new verticals with ease. And so today, the mix looks like -- for us, I mean, we got -- in addition to the core verticals we talked about, we got health care, education, telecom, property management. And our strategy remains very simple because we designed our platform right from the beginning to be vertical-agnostic. And as a result, for us, it's just a matter of getting greater storytellers and great distribution. So a combination of our internal team as well as partners.

Got it. And I guess on the competitive side, what's the competitive environment like today? I feel like Paymentus is kind of underappreciated as 1 of the larger providers in this space. But what do you see from competitive dynamics recently? Has there been any kind of changes recently when you're going through RFPs?

No, I think the competitive environment, frankly, if I go back 10 years, all the players who are there then, they are still here now. So we competed against similar players, same players and have done well. In last 10 years, we might have grown probably 25, 30 times. So we feel like that we are well positioned. And as I shared a little bit earlier, the market is moving somewhat in our direction just because of the strategy we adopted off combining our platform with the Instant Payment Network.

And then maybe we can hit on distribution. I know channel partners is an important piece of the distribution strategy. What are the most important partners today? And just how would you -- how do you think about the mix of kind of direct versus channel?

So 1 of the things we actually right from the beginning, the DNA of the company was that we wanted to be a great sales force of our own. We didn't necessarily want to depend on anyone else for our success. But as the time -- as the business has scaled, we have found that there are great partners where if we combined our experience and their reach, we could achieve actually accelerating results with lower cost there to acquire customers. So we are seeing tremendous progress. We have software vendors as our partners, we have processors as our partners. We have banks as our partners and some other fintechs and so on. So we feel like that the partnership ecosystem in across the verticals we serve in, we have e-digital banking partners for our bill payment distribution in the payment space for the banks. So we feel like we are very fortunate to have the trust of our partners. But we have never been this well positioned before to actually capture through partners. But at the same time, internally in the company, we remain a very sales centric organization -- a growth-centric organization and never lose touch with our customers and prospects.

Maybe shifting to pricing. I know pricing has been kind of new muscle that you've kind of learned to flex over the last couple of years as the -- as we saw some of the issues around inflation and inflation -- particularly inflation around energy costs. What has changed the most over the last couple of years in terms of your pricing discussions with customers? And how do those conversations now take place on a regular basis?

I think -- and Sanjay, you're welcome to add afterwards. But I was just going to say that 1 of the things I would say is I think that inflation for me personally as well as for our entire team -- and we hope to the entire investor community and our customer body in general -- we were able to demonstrate what a good execution looks like. A good management team doesn't take rash decisions, is very thoughtful in difficult times. And whatever actions they take, they take with a long-term perspective, and we did all of that very successfully. We had our contracts already fully capable of raising the price based on inflation adjustment, which basically meant if your average bill payment bill amount has changed for a given billing company, we can raise our pricing, which is what was happening. But we were very thoughtful because we wanted to make sure that inflation was not a very temporary, as we were being told at the time. Once we figure out the inflation actually is rather here to stay for a period of time and it's going to have an impact on us, we were able to demonstrate to our customers that we weren't rushing to make changes. We were having conversations with them and making sure that whatever changes we make are permanent so that we don't have to go backwards in pricing. And as a result, what has happened is now, we also learned that we as a company now, we have become a little bit more confident in having those types of conversations with our customers, seeing how good the reaction was from our customers. And now it is part of our fabric of our organization, of our account management.

Inflation is 1 big reason of doing it and if this matter actually got highlighted during inflation because we were getting impacted by it and we had to take actions to address it. Overall, I would say, other than inflation, there are many other reasons why we will go back to the biller and renegotiate the pricing. That's what supposed for the transactions is much lower than what we were expecting. Or the mix was different than we were expecting. There would be many reasons why we would go and do that. And that's now a part of our regular process. As Dushyant said, it's a part of the fabric. We -- every -- when the agreement comes for renewal. Or when the agreement is during the middle and we want to just look at what the financial metrics are versus what we were expecting. We could go and talk to the billers and make them aware that this is coming during the time of renewal or we could do something before the renewal as well. So it's a part of regular process. It's not something related to 1 particular event. And it's a part of a good improvement, I would say, in the process overall.

Yes. Makes sense. Maybe switching gears to the targets, some of your long-term targets. You talked about 20% revenue growth, 20% to 30% adjusted EBITDA growth and you're running well ahead of those targets. You saw a lot higher growth this quarter -- this past quarter alone. What do you attribute the outperformance to? And just how do you think about the sustainability of that momentum looking ahead?

Well, again, sustainability, it is sustainable. We think that we have a great visibility and based on that, we believe it's sustainable. But the reason why this is happening is twofold. I would say, one, our same-store sales is doing really well. Number two, our strategy of -- which is twofold as well, our go-to-market strategy and the technology platform, we have the value of that. Both are helping and showing the results. Overall, in terms of our bookings we are seeing, the agnostic part of our vertical that any vertical can be implemented. All that's helping. And the force towards movement of our sales force as well as our partnerships and our resellers, they're all driving towards a better engine. And all that is giving us a great visibility. So overall, our long-term targets are still 20% top line and 20% to 30% EBITDA dollar growth. And we've delivered better because that's 1 of the reason overall at the beginning of the year, when we give the guidance. We say that to deliver this guidance, we don't need any new bookings. And as we are seeing improvement in the implementation phase, the new bookings happened could actually deliver results in the same year in which they are booked. So that's an upside. And that's part of it also contributing to our growth and our delivery.

Makes sense. You've emphasized revenue and EBITDA is your primary metrics and then contribution margin or net revenue as a secondary metric when thinking about the company's growth and the Rule of 40 targets. In recent quarters, you've seen contribution profit growth much higher than transaction growth. And so maybe you could just help unpack how to think about the relationship between the 2?

Yes. I mean this could fluctuate quarter-over-quarter, year-over-year, given the kind of billers and the number of billers we are adding into it. Some billers are large, some are small, some have more transactions. But very high revenue generating. Some are low transactions. And the metrics would be different, given we have such a broader mix now. But overall, 1 piece which is very important to our business, especially when you look at the financial metrics is that our operating leverage in the business is very high. So the contribution profit or gross margins slightly get softer, I would say the operating margin of the business is so high that as far as at the bottom, there is an accretiveness we are delivering a better EBITDA dollars, it all offsets. And that's the flexibility we have in the business. Not sure any other business has as much flexibility as we do. And that's kind of the platform which has been built over the years. We don't need a lot of OpEx to generate the business. And whatever OpEx we spend is mainly for year out, not for the same year. So that flexibility is very important. And that is how we are able to calibrate the OpEx and the margin so the adjusted EBITDA margin is better. So you could see short-term fluctuations. But overall, the business is doing well. The financial performance on top line and bottom line is great. And we have a huge TAM in front of us, which we are running to get the market share.

Great. Maybe just about a minute left. Dushyant, I wanted to maybe touch on capital allocation. You've been 1 of the most consistently profitable companies in the sort of '21 IPO cohort, there was no pivot to profitability in 2022 like a lot of your peers. And you have done some M&A over the time that's been successful, particularly on bolstering the IPN strategy. So what are your thoughts on M&A from here? And what are the types of assets that you would consider?

First of all, thank you for the kind words. I think it's good to be in a situation where we are generating cash and still have cash on the balance sheet pretty -- we have a pretty strong balance sheet. We don't need anything specific at this stage. We feel like our product portfolio is pretty complete. However, we are opportunistically looking at assets where they could be accretive to us. Ideally on both top line and the bottom line, but even if we could get 1, we believe that we can get the other 1 figured out. So we are looking at all of those options.

Got it. Makes sense. I think that's about all the time we have, but thank you so much for joining.

Thank you so much for having us.

Thank you.